Silver price rebounds as US Dollar weakness clashes with rising rate expectations
- Silver gains more than 2% on Wednesday and attempts to extend its rebound following recent weakness.
- Surging Oil prices fuel inflation concerns and strengthen expectations of higher US interest rates.
- US Dollar weakness supports the white metal, but rising Treasury yields limit its upside potential.
Silver (XAG/USD) rebounds on Wednesday and trades around $67.50 at the time of writing, up 2.64% on the day. The white metal benefits from broad weakness in the US Dollar (USD), but its recovery faces a challenging environment for precious metals as surging energy prices revive inflation concerns and strengthen expectations of higher US interest rates.
The US Dollar remains under pressure, notably due to a sharp appreciation of the Japanese Yen (JPY). The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, falls around 0.25% on Wednesday and trades near 98.61, close to its lowest level since August 21. A weaker US Dollar tends to support Silver by making the precious metal cheaper for investors using other currencies.
This support is nevertheless offset by the sharp rise in Oil prices amid escalating tensions between the United States (US) and Iran. The US military says it destroyed five Iranian Oil tankers after the Islamic Revolutionary Guard Corps (IRGC) attempted to attack a US Navy warship. Tehran responded by targeting several American vessels and Oil tankers, while concerns over the security of the Strait of Hormuz remain elevated. Persistently elevated energy prices could sustain inflationary pressures and force major central banks to maintain tighter monetary policies.
In the United States, these developments are also fueling expectations of further tightening by the Federal Reserve (Fed). According to the CME FedWatch Tool, markets currently price in around a 62% chance of a 25-basis-point rate hike at the September 15-16 meeting. This prospect represents a headwind for Silver, a non-yielding asset that tends to become relatively less attractive when interest rates rise.
US Treasury yields also reflect these expectations. The benchmark 10-year US Treasury yield trades around 4.80%, near its highest level since November 2023. The combination of elevated yields and expectations of tighter monetary policy therefore limits the metal's ability to fully benefit from the weaker US Dollar.
On the economic front, Automatic Data Processing (ADP) data shows that US private employers added an average of 12K jobs per week during the period ending August 22, compared with a downwardly revised 10K previously. Investors now turn their attention to the Producer Price Index (PPI), due on Thursday, and the Consumer Price Index (CPI), scheduled for Friday. Hotter-than-expected inflation figures could reinforce expectations of a Fed rate hike and put renewed pressure on Silver.
Silver FAQs
Silver is a precious metal highly traded among investors. It has been historically used as a store of value and a medium of exchange. Although less popular than Gold, traders may turn to Silver to diversify their investment portfolio, for its intrinsic value or as a potential hedge during high-inflation periods. Investors can buy physical Silver, in coins or in bars, or trade it through vehicles such as Exchange Traded Funds, which track its price on international markets.
Silver prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can make Silver price escalate due to its safe-haven status, although to a lesser extent than Gold's. As a yieldless asset, Silver tends to rise with lower interest rates. Its moves also depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAG/USD). A strong Dollar tends to keep the price of Silver at bay, whereas a weaker Dollar is likely to propel prices up. Other factors such as investment demand, mining supply – Silver is much more abundant than Gold – and recycling rates can also affect prices.
Silver is widely used in industry, particularly in sectors such as electronics or solar energy, as it has one of the highest electric conductivity of all metals – more than Copper and Gold. A surge in demand can increase prices, while a decline tends to lower them. Dynamics in the US, Chinese and Indian economies can also contribute to price swings: for the US and particularly China, their big industrial sectors use Silver in various processes; in India, consumers’ demand for the precious metal for jewellery also plays a key role in setting prices.
Silver prices tend to follow Gold's moves. When Gold prices rise, Silver typically follows suit, as their status as safe-haven assets is similar. The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, may help to determine the relative valuation between both metals. Some investors may consider a high ratio as an indicator that Silver is undervalued, or Gold is overvalued. On the contrary, a low ratio might suggest that Gold is undervalued relative to Silver.
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